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Evaluating Changes in a Multimanager Lineup

It's not a simple task, but that's no reason to stay away from these funds.

Gregg Wolper, 06/24/2014

Most investors dread the day that their fund's portfolio manager departs. The new leader may lack suitable experience, have a less impressive record, or institute an unwelcome change in strategy. For shareholders, it takes time and effort to determine whether the fund is still worth owning. If the decision is no, selling it can cause tax complications, and finding a replacement takes more time and effort.

Even if shareholders decide to hold on, they must monitor the fund more closely afterward.

However, for many funds, this scenario is outdated. Instead of having one key leader, running the fund solo or with comanagers who are subordinate, these portfolios are led by multiple managers with similar levels of responsibility. In some cases, the fund's advisor uses two or more in-house investors to run the fund as equal co-lead managers. In other cases, advisors such as Vanguard or Litman Gregory delegate the management to a number of subadvisory firms, each of which may themselves assign their slice of the portfolio to several portfolio managers rather than just one.

This phenomenon has been dubbed "the decline of the star manager," but that's misleading. Very few managers have ever been recognized widely enough by the general public to truly merit that label. A better way to describe the trend might be "the downplaying of the solo manager."

Evaluating a Departure
Investors thus can face a different and more complicated challenge when a manager departs. If the manager heading out was just one of three equal comanagers, or one of several subadvisors, it can be tough merely to assess the significance of the departure.

When there are several managers from the same shop running the fund, the advisory firm may downplay the contributions of the departed manager and highlight the importance of those who remain. Investors, advisors, and fund analysts who have followed the fund and have dealt with its managers over time can judge the departure's importance based on that past experience, but the majority of shareholders may feel frustrated, unable to determine even if their fund has experienced a meaningful manager change or not.

Fortunately, unlike a stock, the price of a diversified fund won't collapse overnight while these shareholders watch and wait. There's time to evaluate the fund's next portfolios to see if changes in the holdings may indicate a change of direction.

Returns can also help provide guidance. While one must use short-term performance with caution, in some cases that data can also indicate if the strategy has remained intact. For example, investors can see if the fund continues to perform as they would normally expect given its previous strategy combined with the conditions in the market.

Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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